INSIGHT: Enjoy China’s chemicals imports while they last

06 November 2009 16:03[Source: ICIS news]

By John Richardson

SINGAPORE (ICIS news)--If you are selling chemicals in China and only focusing on your year-end bonus what happens next year might not matter. Anyone with a longer-term perspective should probably take a slightly different view.

The hope for short-sighted traders is that the boom will continue until end-December and there is every chance this might happen. Production at new Chinese and ?xml:namespace>Middle East cracker complexes has yet to be stabilised, and there’s still a lot of economic stimulus working through the economy.

It’s not just those with a longer-term view who should be worried, but also anybody who looks beyond China at the impact on total global chemicals demand.

Lower raw-material import tariffs, increased export tax credits and a yuan now linked to the US dollar (as a result, very much down in value during 2009 against several other Asian currencies) means that China has an even bigger edge than normal in export markets.

There is also, perhaps, the biggest advantage of all - mountains of very cheap bank loans.

“Now it starts to make a little more sense," said a polymer industry source. While the stimulus package has added a lot to domestic consumption, the surge in polymer imports of more than 50% doesn’t add up when you measure this against the fall in overall exports.

Local auto and construction industries are booming, sucking in lots of chemicals.

But a very macro level, of the 7.7% of GDP (gross domestic product) growth recorded for the first nine months of this year, 7.3 percentage points was accounted for by investment and only 0.4 of a percentage point by consumption growth.

While China’s total exports were by 11.8% in September over the previous month, they were still down by 15.2% year-on-year.

Gains, though, could have been made in specific export sectors at the expense of higher-cost competitors. China might be winning bigger slices of what is a much-smaller global demand pie than in 2007.

One example of big gains is reportedly in electronic goods shipments to the US at the expense of Japan.

Nicaragua, El Salvador, Honduras, Guatemala and Mexico are said to have seen their exports of knit apparel to the US fall by 19-24% in the year to July, according to some reports. Is this mainly the result of gains made by China?

China’s yarn output grew by 9% in the six months to June 2009 over the same period last year with fibres production 10% higher and polyester up by 13%, he added.

You could use this to help explain the 5% rise in monoethylene glycol (MEG) imports in the six months to end-July.

In September, imports hit an all-time for any one month at 551,113 tonnes.

The largest supplier of clothing to the US in the year to June 2009 was China with a 34.5% share by value - 3.9 percentage points higher than the previous year, adds a new report by consultancy, Textiles Intelligence.

Export orders at the recent Canton Trade Fair were 16% higher than the previous fair, which took place in May. Total contracts won rose to $30.5bn with the biggest increases seen in orders for electronics and appliances, and machines.

But wouldn’t any other country in China’s position do the same thing?

China needs to protect growth and so support for exports makes sense in the short term.

The government has made it very clear that it wants to rebalance the economy towards stronger domestic growth over the long term, and huge infrastructure investment is towards this end.

If you take this view, when economic stimulus shifts away from supporting exports, chemicals import volumes will slip.

If this doesn’t happen quickly enough to keep manufacturing industries and politicians happy in the rest of the world, we could see a rise in protectionism that could also jeopardise these imports.

The rise in local chemicals capacities, part of the government’s big investment splurge, is another risk.

Plants brought on-stream this year are likely to be fully operational in 2010 with more start-ups planned for next year and beyond.

Most importantly, does the export market-share story stand up at all? Is it just a weak after-the-fact explanation because we don’t have adequate domestic demand data from China?

“It’s certainly true that lower costs have helped China produce more goods in general, but we are going to see a lousy Christmas selling season in the US and Europe - you can depend on it,” said a US-based industry observer.

“You will then discover that a lot of stuff that’s been made is sitting warehouses.”

Statistics can also be used selectively and, therefore, misleadingly.

The Textiles Intelligence report, for example, adds that the 3.9% percentage point rise in Chinese exports to the US is lower than had been expected.

In a stronger economy the increase would have much greater as the US removed safeguard duties against Chinese imports last December. Would there have been any increase at all if these duties had stayed in place?

One thing is clear: Nobody this correspondent has talked to (and he’s talked to an awful lot of people) can fully explain staggering chemicals imports numbers.

For the time being, though, why worry?Be happy and look forward to your year-end bonuses.